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Extended VAIC
Extended VAIC model: measuring model
intellectual capital components
Jamal A. Nazari and Irene M. Herremans
Haskayne School of Business, University of Calgary, Calgary, Canada 595
Abstract
Purpose – In the intellectual capital (IC) literature, only a few studies have analyzed the relationships
among the components of IC and organizational success. This study sets out to extend the current
models to provide further insight into the role of IC in organizational performance.
Design/methodology/approach – The study provides a theoretical discussion designed to push
the measurement of IC into a more rigorous and comprehensive domain.
Findings – As this is a theoretical paper, several hypotheses are presented for testing in the future.
Practical implications – Recognizing the most influential elements of IC on organizational
performance would help organizations to understand better the organizational capabilities they
possess. In addition, the suggested extension would enable researchers to use archival resources to do
cross-company comparisons.
Originality/value – The suggested extension to the VAIC model builds on several IC models that
have not been well-connected in the literature previously.
Keywords Intellectual capital, Market value, Financial performance
Paper type Conceptual paper

Introduction
Although the importance of intellectual capital (IC) has increased greatly in the last two
decades (Serenko and Bontis, 2004), many organizations are still struggling with better
management of IC due to measurement difficulties (Dzinkowski, 2000). Many authors
have argued that IC, which represents the stock of assets generally not recorded on the
balance sheet, has become one of the primary sources of competitive advantage of a
firm (Bontis, 1996; 1998, 2001; Edvinsson and Malone, 1997; Roos et al., 1998; Stewart,
1997; Sveiby, 1997). Given the remarkable shift in the underlying production factors of
a business within the new knowledge economy (Drucker, 1993), it is important for
firms to be aware of the elements of IC that could lead to value creation.
Because traditional financial and management accounting instruments are not able
to capture all aspects of these new values and report them to organizational managers
and stakeholders, there is a high demand for an appropriate corporate reporting
structure. New tools will facilitate the management of these new value drivers in a
systematic way, enabling enhanced business reporting. Over the past few years many
methods have been developed for the measurement and valuation of IC (Sveiby, 2007).
However, none of the studies has analyzed the interconnection of these measurement
models, and few studies have analyzed the influence of the construct on organizational Journal of Intellectual Capital
Vol. 8 No. 4, 2007
success. Building upon strategic theories of the firm, our study aims to offer a model to pp. 595-609
explore and recognize the relationship between components of IC and organizational q Emerald Group Publishing Limited
1469-1930
financial success. DOI 10.1108/14691930710830774
JIC Definition of IC
8,4 Until now, the definitions of IC have been discordant. In recent years, driven by
necessity, many individuals and groups from different disciplines have tried to agree
on a standard definition for IC (Edvinsson and Malone, 1997). Initially, Edvinsson and
Malone’s (1997) and Stewart’s (1997) research helped to bring the term to the forefront.
Edvinsson and Malone (1997, p. 358) defined IC simply as “knowledge that can be
596 converted into value.” Stewart (1997, p. x) broadened the definition to IC as “intellectual
material – knowledge, information, intellectual property, experience – that can be put
to use to create wealth” by developing competitive advantage in an organization. When
intellectual material is formalized and utilized effectively, it can create wealth by
producing a higher value asset, called IC.
In the ensuing years, there have been many attempts to re-structure or re-define IC.
However, most definitions decompose IC into three primary dimensions: human
capital, structural capital, and relationship capital (Bontis, 1996, 1998; Bontis et al.,
2000; Edvinsson and Malone, 1997; Edvinsson and Sullivan, 1996; Roos et al., 1998;
Saint-Onge, 1996; Stewart, 1991, 1997; Sveiby, 1997), although not always referred to
by exactly these terms (see Kaufmann and Schneider, 2004, for a listing of terms and
definitions used for this concept).

Human capital
As early as the 1960s, Gary Becker, recipient of the 1992 Nobel Prize in Economic
Science, recognized the importance of human expertise. He argued that “expenditures
on education, training, and medical care, [. . .] produce human, not physical or financial,
capital because you cannot separate a person from his or her knowledge, skills, health,
or values the way it is possible to move financial and physical assets while the owner
stays put” (Becker, 1964, p. 16). Human capital constitutes both the broader human
resource considerations of the business workforce and the more specific requirements
of individual competence in the form of knowledge, skills and attributes of employees
(McGregor et al., 2004). Human capital is movable and does not belong to a specific
organization because employees are considered to be the owners of human capital
(Roos et al., 1998). According to Stewart (1997) human capital is “the place where all the
ladders start: the wellspring of innovation, the home page of insight” (p. 86). Bontis
(1999) argued that human capital is important since it is the source of strategic
innovation for organizations.

Structural capital
Structural capital deals with the structure and the information systems which can lead
to business intellect. Structural capital comprises all kinds of “knowledge deposits”,
such as organizational routines, strategies, process handbooks, and databases (Boisot,
2002; Ordonez de Pablos, 2004; Walsh and Ungson, 1991). Human capital is the
primary factor for developing structural capital. Therefore, structural capital is
dependent on human capital. Structural capital is the knowledge that stays in the firm
when employees go home for the night (Ordonez de Pablos, 2004; Roos et al., 1998);
therefore, the company is the residual owner of structural capital. Even though
influenced by human capital, structural capital exists objectively and independent of
human capital (Chen et al., 2004). For example, patents are created by human capital,
but after creation they belong to the company.
Relational capital Extended VAIC
The third main element of IC is relational capital. It is defined as the ability of an model
organization to interact positively with business community members to motivate
the potential for wealth creation by enhancing human and structural capital (Marti,
2001). Relational capital comprises the knowledge embedded in all the relationships
an organization develops, whether it is with customers, competitors, suppliers,
trade associations or government bodies (Bontis, 1999). One of the main categories 597
of relational capital is usually referred to as customer capital and denotes the
“market orientation” of the organization. There is no consensus on a definition of
“market orientation” (Bontis et al., 2000), but Kohli and Jaworski (1990) defined it
as the organization-wide degree of market intelligence generation, dissemination,
and action based on the current and future needs of customers. Perhaps first
recognized in the Balanced Scorecard (Kaplan and Norton, 1992), client and
customer capital (Bontis, 1998; Bontis et al., 2000; Saint-Onge, 1996) and relational
capital (Bontis and Fitz-enz, 2002) are embodied in the concept of a learning
organization (Armstrong and Foley, 2003; Dewhurst and Navarro, 2004; Senge,
1992; Bontis et al., 2002).

Existing theories of IC measurement

Measurement of IC as a way to assess a company’s intangible assets is well accepted
both in academia and practice. Reviewing the literature indicates a mounting number
of studies on IC measurement. However, the measurement of IC is still in an
exploratory stage. There is no consensus on a general measurement approach or
coherent measurement theory for IC. The involvement of researchers from different
disciplines such as accounting, economics, finance, strategy, human resources, and
psychology has led to the multidimensionality of IC measurement using different
theories to justify IC measurement. Studies focusing on IC measurement differ in their
reasons as to why companies should measure their IC.
Using a systematic literature review, Marr et al. (2003) suggested that organizations
should measure their IC for three main reasons:
(1) strategy;
(2) influencing behaviour; and
(3) external validation.

In the following sections, IC measurement theories are briefly explained using Marr’s
framework.

Strategy
The reliance of organizations on their IC as a source of competitive advantage is
increasing tremendously. Both academia and industry have developed new language
to accommodate IC. Organizations compete in an era of a “knowledge economy”,
technical jobs are occupied by “knowledge workers”, and “learning organizations” will
progress in the knowledge economy. In a competitive environment, where small firms
are increasing their market share by introducing innovative high-quality products and
services, it is an organization’s IC that increasingly determines its competitive position
(Klein, 1998). Teece et al. (1997) divided the strategic reasons for better performance of
some firms into three different paradigms:
JIC (1) the competitive forces;
8,4 (2) the resource based; and
(3) evolutionary dynamics.

Influencing behaviour
598 Many organizations have found that the sole reliance on financial measurements will
lead to short-term results (Johnson and Kaplan, 1987; Kaplan and Norton, 1992) if those
measures are linked to the compensation system (Bushman et al., 1995). An increasing
number of studies suggest that non-financial performance measures are better
predictors of long-term performance and thus should be used to help refocus managers
on the long-term aspects of their decisions (Ittner et al., 2003).
Johnson and Kaplan (1987) argued that:
Reported earnings cannot show the company’s decline in value when it depletes its stock of
intangible resources. Recent overemphasis on achieving superior long-term earnings
performance is occurring just at the time when such performance has become a far less valid
indicator of changes in the company’s long-term competitive position.
Kaplan and Norton (1996, p. 7) stated that “the collision between the irresistible force to
build long-range competitive capabilities and the immovable object of the
historical-cost financial accounting model” has created a need for a new system for
performance measurement, one that includes non-financial performance measures.

External validation (communication to external stakeholders)

The pressure on companies to measure and report the value of IC is increasing and will
eventually affect the firms’ IC policies (Marr et al., 2003). There are several theories
taken from the social and environmental literatures that justify companies disclosing
IC in their annual reports (Guthrie et al., 2004). Two of the most widely used theories
are legitimacy theory and stakeholder theory.
According to legitimacy theory, organizations exist in societies under an expressed
or implicit social contract (Campbell, 2000). Dowling and Pfeffer (1975) maintained that
organizations operate in a super-ordinate social system in which organizations have
legitimacy when their activities are congruent with the goals or expectations of this
social system. Therefore, changes in the value system embedded in the super-ordinate
social system will cause value changes in organizations in social ways. Based on
legitimacy theory, an organization would voluntarily report on activities if
management perceived that the particular activities were expected by the
communities in which the organizations exist.
Companies are more likely to report on their IC if they specifically have a need to do
this, as they might not legitimize their status through reporting of tangible assets that
are recognized as symbolic of traditional corporate success (Guthrie et al., 2004).
Mouritsen (2004)) argued that traditional financial statements do not include the
relevant information for users of these statements to understand how their invested
resources might create value for them in the future. They maintained that IC
measurement and reporting are designed to bridge this gap by providing information
about how their resources – the majority of which might be intangibles – create value
in the future.
 The second most widely used theory taken from social and environmental literature Extended VAIC
that justifies companies disclosing IC in their annual reports (Guthrie et al., 2004) is model
stakeholder theory. Freeman (1984, p. 5) defines stakeholders as “any group or
individual who is affected by or can affect the achievement of an organization’s
objectives”. According to stakeholder theory, managers must formulate and implement
strategies to satisfy those groups who have a stake in the business. The main task in
this process is to manage and integrate the relationships and interests of shareholders, 599
employees, customers, suppliers, communities and other groups in a way that
guarantees the long-term success of the firm (Freeman and McVea, 2002). Guthrie et al.
(2004) posed the question of whether companies offer a voluntary account of their IC
and the value of their intangible assets as a result of stakeholder theory. They call for
more studies to reach a conclusive answer to this question.

Measurement theory
Some studies (M’Pherson and Pike, 2001; Pike and Roos, 2004; Pike et al., 2001) have
applied elements of measurement theory to the assessment of IC. These elements
should serve as the basis for developing, reasoning about, and applying IC measures.
Pike et al. (2001) argue that the 13 canonical requirements of a measurement system
provide a means by which non-financially based measurement systems can achieve the
same (or better) degrees of rigor as financially based ones. Pike and Roos (2004)
evaluated some of the most widely used methodologies of measuring IC against the
axioms of measurement theory and found out that none of them is compliant.

IC measurement
According to the extant literature, the suggested measuring methods for IC fall into
four main categories:
(1) direct;
(2) scorecard;
(3) market capitalization; and
(4) return on assets (ROA).

These methods can be differentiated by whether they result in a monetary or

non-monetary, micro- or macro-level measurement. Direct methods of estimating IC
derive the monetary value of intangible assets by identifying its various
micro-components. Similar to direct methods, but without determining monetary
value, scorecard methods use indicators or indices to report performance in graphs or
charts. In contrast, both market capitalization and ROA methods result in a
macro-level aggregate measurement of IC for an organization. Market capitalization
methods derive a monetary amount for IC by determining the difference between a
company’s market capitalization and its stockholders’ equity on its balance sheet.
Finally, the return on assets (ROA) method uses average pre-tax earnings and divides
them by average tangible assets. The difference between company and industry ROA
is then multiplied by the company’s average tangible assets to calculate average
earnings from the intangibles. Dividing the average earnings by the company’s
average cost of capital or interest rate provides an estimate of the value of its intangible
assets or IC.
JIC These four categories are an extension of the classifications suggested by Luthy
8,4 (1998), and a discussion of each method under these classifications is beyond the scope
of this study. Sveiby (2007) provides an excellent summary of 34 measurement
methods and their categorizations into the above-mentioned categories.

Conceptual model
600 As indicated, over the past few years many methods have been developed for the
measurement and valuation of IC. However, very few studies have analyzed the
interconnection of these models (Bontis, 1998, 1999, 2001, 2004; Bontis et al., 2000,
2002), the relationship between constructs developed in these models, and
organizational success (Chen et al., 2005; Firer and Williams, 2003). This study
provides an extended model to test the association of leading IC components with the
company’s financial success. The Skandia Navigator (Edvinsson and Malone, 1997) is
one of the earliest models of IC. In addition to the financial focus (representing the total
market value of a company), the Skandia Navigator addresses not only the three
traditional IC components of human, organizational, and relational capital, but also
recognizes renewal and development as a separate component. Edvinsson and Malone
(1997) use metrics or indicators for IC, such as value added per employee, number of
employees, customers lost, laptops per employee, and share of training hours. Such
results provide a report card with input, output, and outcome indicators for the
organization’s officials to determine whether or not progress is being made with
reference to IC management and development.
Building upon Skandia Navigator’s conceptual framework, Bontis (2004) developed
a National IC Index (NICI). The NICI aims at uncovering and managing intangible
wealth of a nation in five core areas. The NICI model inter-relates market capital,
renewal capital, process capital, and human capital as a means of discovering the
intellectual wealth of a nation. Bontis (2004) specified several indices for each
construct. For example, for the measurement of financial capital, he used gross
domestic production per capita and then normalized the index based on purchasing
power across countries. Based on the developed model, Bontis (2004) made a
comparison among different Arab countries, and found that national IC accounts for 20
percent of financial wealth in Arab countries, with IC being the pre-eminent antecedent.
Pulic, partially based on Skandia Navigator (Pulic, 1998, 2000, 2004), has developed
the value creation efficiency analysis, called VAIC (value added intellectual coefficient;
see Figure 1), which uses data from financial statements. Using value added to measure
performance, Pulic’s model identifies both size and efficiency of IC rather than just
quantities and prices. Pulic (2004) criticized other IC measurement models because they
lack comparability and scope.

Figure 1.
VAIC conceptual model
Although the VAIC model has its own limitations, the application of VAIC as an Extended VAIC
indicator of IC is better for statistical analysis primarily due to the public availability of model
the input data to the model (Andriessen, 2004). Schneider (1998) argued that the more
sophisticated the procedures to collect and process data, the higher the danger that data
collection and processing become ends in themselves. Schneider (1998) maintained that
VAIC is the result of a simplifying process that enables cross-sectional comparisons.
Firer and Williams (2003) mentioned that many developed models of IC measurement 601
are customized to fit the profile of a specific firm and therefore limit comparability.
Furthermore, Firer and Williams (2003) maintained that all data applied in the VAIC
calculation are based on audited information, which is objective and verifiable (Pulic,
1998, 2000). Williams (2001) criticized other measures of IC for the subjectivity
associated with their underlying indicators.
There have been several studies in the field of IC using the VAIC model as the
primary measurement method of IC. Investigating Austrian industries, Bornemann
(1999) found a correlation between intellectual potential and economic performance.
Using VAIC as the measure of IC performance for a sample of UK publicly listed
companies, Williams (2001) did not find a systematic relationship between IC
performance and the quantity of IC disclosure. However, the results of his study
suggest that if IC performance is too high the amount of disclosure is reduced. Using a
sample of publicly traded South African firms, Firer and Williams (2003) studied the
relationship between the efficiency of value added by the main elements of a firm’s
capital (physical, human, and structural) and corporate performance. The results of
their study indicated that the relationship between the efficiency of IC and corporate
performance is limited and mixed. The results suggested that physical capital remains
the major source of corporate performance in South Africa. In a more recent study,
using a sample of Taiwanese firms, Chen et al. (2005) found that IC has positive effects
on market value and financial performance.
The sample of studies mentioned above represents the widespread usage of the
VAIC model in different contexts. Despite all the advantages mentioned above, we
believe that the VAIC model can be improved even further by the addition of more IC
constructs. To achieve this objective, we apply the Skandia Navigator model as the
conceptual model of this study. Then, we develop several indicators to measure the
constructs, similar to the study of Bontis (2004) but not on a national level, rather on an
organizational level. The taxonomy used in this study is depicted in Figure 2.

Development of research propositions

The set of hypotheses in this study that explores the relationship between human,
structural and relational capital and financial capital is partially based on the work by
Bontis (1998, 2004; Bontis et al., 2000). Using a questionnaire for data collection, Bontis
(1998) found a significant relationship between each element of IC (human,
organizational, and relational) and firm performance. Several financial measures
such as profit, profit growth, sales growth and ROI were used as indicators of firm
performance. He also found significant associations between IC elements. In another
study that used the same questionnaire, Bontis et al. (2000) studied the
interrelationship of the components of IC and the relationship between structural
capital and firm performance. However, their tested model did not include the
relationship between other components of IC and firm’s performance.
JIC
8,4

602

Figure 2.
Intellectual capital
taxonomy

Building partially upon the work of Bontis (Bontis, 1998, 2004; Bontis et al., 2000), the
first set of hypotheses for this study is developed to explore the interconnection of IC
elements. It is assumed that human capital is necessary in order to establish structural
and relational capital (Bollen et al., 2005; Bontis, 2004). Bollen et al. (2005) contemplated
that the more knowledge and skills the employees possess, the more they see the need
for structural and relational capital and the more they collaborate on its development.
Applying the argument put forth by Bontis (2004) to the firm level, it is
hypothesized that as firms codify their employees’ knowledge into the systems and
processes of an organization (H1), those structural capital assets can then be renewed
for the future (H2) by investing in research and development. A feedback loop further
develops a firm’s human capital (H3). Eventually, the codified knowledge base of a
firm can be marketed (H4). As human capital continually develops (H5), a firm’s ability
to market its intellectual wealth will result in a higher financial well-being (H6) (see
Figure 3).
H1. Human capital is positively associated with process capital.
H2. Process capital is positively associated with renewal capital.
H3. Renewal capital is positively associated with human capital.
H4. Process capital is positively associated with customer capital.
H4.1. Process capital is positively associated with relational capital.
H5. Human capital is positively associated with financial capital.
H6. Customer capital is positively associated with financial capital.

Variable definition
The construct measurement is defined by building upon previous works in the field of
IC and then introducing measures that serve as best proxies for constructs in the
conceptual model. The primary method used to obtain data that would allow construct
 Extended VAIC
model

603

Figure 3.
Conceptual map to test the
first set of hypotheses

measurement is the VAIC model. The procedures to measure different constructs in the
VAIC model are described below.
According to the VAIC model, the value added is the difference between output and
input:
VA ¼ OUT 2 IN;
where VA is the value added for the company, OUT is the total sales (revenues), and IN
is the cost of brought-in materials, components and services.
Value added can be calculated from existing information in annual reports as
follows:
VA ¼ OP þ EC þ D þ A;
where OP is operating profit, EC is employee costs, D is depreciation, and A is
amortization.
Consistent with the literature, the value added would be the sum of labor expenses,
corporate taxes, dividend, interest expenses, amortization and depreciation, minority
shareholders, and retained earnings. VAIC calculates the efficiency of both intellectual
capital and financial capital. Partially based on the Skandia Navigator intellectual
capital measurement model, VAIC is composed of human capital and structural capital.
VAIC does not consider expenditures on employees as a part of input. This denotes
that expenses related to employees are not treated as cost but represent an investment.
As a result, the of human capital efficiency (HCE) is calculated as follows:
HCE ¼ VA=HC;
where HCE is the human capital efficiency coefficient for the company, VA is value
added and HCis the total salaries and wages for the company. Structural capital, the
second component of IC, is calculated as follows:
SC ¼ VA 2 HC;
JIC where SC is the structural capital for the company, VA is value added, and HC is the
8,4 total salaries and wages paid. Based on the above calculation, structural capital
efficiency (SCE) is:

SCE ¼ SC=VA;

604 where SCE is the structural capital efficiency for the company, SC is the structural
capital and VAis the value added. Intellectual capital efficiency (ICE) is calculated as
the sum of the partial coefficients of human and structural capital:

ICE ¼ HCE þ SCE;

where ICE is the intellectual capital efficiency coefficient, HCE is the human capital
efficiency coefficient, SCE is the structural capital efficiency coefficient.
Pulic (2004) argued that to have a broad picture of efficiency of value creating
resources, it is important to take financial and physical capital into consideration.
The efficiency of the financial capital employed can be obtained in the following
way:

CEE ¼ VA=CE;
where CEE is the capital employed efficiency coefficient, VA is value added, and CE
is the book value of the net assets of the company. Overall value creation efficiency
is simply the sum of all value creation efficiency indicators:

VAIC ¼ ICE þ CEE;

or

VAIC ¼ ½ðVA=HCÞ þ ðSC=VAÞ
þ VA=CA;

where VAIC is the value added intellectual coefficient, ICE is the intellectual capital
efficiency coefficient (HCE þ SCE), CEE is the capital employed efficiency
coefficient (VA/CA), and CA is physical capital.
In summary, the VAIC represents how much new value has been created per
invested monetary unit in each resource.
Based on the theories of compensation and an efficient labor market, the VAIC uses
total the compensation paid to employees as the proxy to assess the value of human
capital. If the labour market is efficient, then employees will be paid based on the value
of their human capital. Human capital efficiency is calculated in the same way as in the
VAIC model.
As illustrated earlier, the VAIC model assumes that structural capital is value added
minus human capital. According to the taxonomy of this study, structural capital is
composed of organizational capital and customer capital:

SC ¼ CC þ OC;
where CC is customer capital, and OC is organizational capital. Organizational capital
is composed of process capital and innovation capital:
 OC ¼ InC þ PC; Extended VAIC
where InC is innovation capital and PC is process capital. Therefore: model
SC ¼ CC þ InC þ PC:
In the VAIC model the structural capital efficiency (SCE) is calculated in the following
manner: 605
SCE ¼ SC=VA;
or alternatively it can be decomposed to:
CC þ InC þ PC
SCE ¼ :
VA
Therefore, structural capital efficiency is the sum of efficiencies of customer capital
plus innovation capital plus process capital:
CC InC PC
SCE ¼ þ þ ;
VA VA VA
or:
SCE ¼ CCE þ InCE þ PCE:
Marketing is concerned with the task of developing and managing customer
relationships. Therefore, marketing cost is used as a proxy for the measurement of
customer capital. In order to standardize the proxy for the measurement of customer
capital and to find out what percentage of value added is created through marketing,
the marketing cost is divided by the value added:
CC Marketing costs
CC ! CCE ¼ ¼ :
VA VA
Research and development (R&D) expenditure has been used extensively in the
literature as a proxy for innovation capacity (Bosworth and Rogers, 2001). The
efficiency of innovation is calculated the following manner:
InC R&D
RenC ! InCE ¼ ¼ :
VA VA
Process capital efficiency would simply equal structural capital efficiency minus
customer capital efficiency minus innovation capital efficiency:
SCE ¼ CCE þ InCE þ PCE:
Therefore:
PCE ¼ SCE 2 InCE 2 CCE:
JIC Discussion and conclusion
8,4 In spite of the growing importance of recognition and measurement of intellectual
capital highlighted in the previous parts of this paper, yet more effort needs to be taken
by researchers to enable cross-company comparisons. Most of the models developed
thus far are attempts to measure intellectual capital within companies based on the
indicators that are not publicly available data. This inherent limitation of many
606 micro-level models was alleviated by the introduction of the VAIC model in the IC
literature. Since then, the VAIC model has been used extensively to compare the IC
performance in different settings.
NICI, developed by Bontis (2004), was also an attempt to measure the IC
components at the national level enabling international comparisons. Although both
models are partially based on the Skandia Navigator, the NICI offers more IC
sub-construct measures in comparison to the VAIC model. The present study is an
attempt to match these two models in order to facilitate and provide additional insight
to the cross-company comparison of IC performance. Based on the publicly available
data, measures of customer capital, process capital, and innovation capital were
introduced in the current study.
We undertook a pilot study applying the developed model to some North American
companies. Initial analyses indicated the feasibility of our study. A cross-sectional
analysis using a large North American sample is under investigation by the
researchers. However, other researchers are encouraged to apply our suggested model
in different settings.

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Corresponding author
Jamal A. Nazari can be contacted at: jamal.nazari@haskayne.ucalgary.ca

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